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Ch. 2 Trade Barriers, Trade Promotion Efforts and Trade Agreements: 

Ch. 2 Trade Barriers, Trade Promotion Efforts and Trade Agreements Trade Barriers. Tariffs – taxes based on the value of imported goods and services. Usually by product categories, sometimes countries. Revenue generating, discourage imports of undesirable products, ‘level the playing field’. Quotas – Restrictions on the number or monetary value of products that can be imported, (sometimes market share). Usually product and country specific. Voluntary Export Restraint – Country specific. Usually under pressure and severe threats. Designed to help domestic industries reorganize and restructure. Not subject to any previous trade accords. Monetary Barriers – exchange control, nonconvertible currency, differential exchange rates. Usually balance of payment problems (developing countries).

Trade Barriers.: 

Trade Barriers. Standards – Product specific. Health, Safety, Quality, Performance. Designed to protect consumers but are often disguised barriers. Local Content Requirements – Designed to aid domestic economy by either increasing sales of local manufacturers or encouraging foreign direct investment. Investment Restrictions – Restrictions on the percentage of ownership of local firms by foreign manufacturers. Designed to keep decision making and ownership in local hands. Bureaucratic Hurdles – Licenses, Testing, Certification, Buy domestic campaigns, Boycotts etc.

Export promotion efforts.: 

Export promotion efforts. Export information and advise. (www.usatrade.gov) Production support. Marketing support. Finance and Guarantees - Export-Import Bank, Agency for International Development, Overseas private Investment Corp. Tax legislation.

Foreign Investment promotion efforts.: 

Foreign Investment promotion efforts. Subsidies (e.g., Mississippi $295 million package to Nissan, Alabama 119 million to Mercedes, and 158 million to Honda, BMW in Spartanburg got $100,000 per job created). BMW Spartanburg Nissan Mississippi Honda Alabama

Foreign Investment promotion efforts.: 

Foreign Investment promotion efforts. Financial – land or buildings, loans or loan guarantees, new infrastructure. Tax Incentives – credits or rebates, depreciation allowance, special deductions, tax holidays. Non-financial – Elimination of tariff and non-tariff barriers, protection from competition through barriers, Job training programs, protection from unions. Foreign Trade Zones (customs privileged facilities).

Foreign Trade Zones : 

Foreign Trade Zones Areas where goods can be imported for storage and/or processing with tariffs and quota limits postponed until products leave the designated areas. If goods processed and exported than tariffs only on value added.

Foreign Trade Zones: 

Foreign Trade Zones If goods processed and sold in the country than tariffs only on parts imported. Located all over the world – more than 150 in the US. http://www.igeo.ufrj.br/gruporetis/sistfin/mapas/mapaglobal.jpg

Advantages of Foreign Trade Zones: 

Advantages of Foreign Trade Zones Use of cheap labor or skilled workforce, and local content without paying duties. Lower tariffs for parts and lower transportation and insurance costs. Stockpile products while waiting for quotas or buyers. No duties on rejected or unsold products. Maquiladoras in Mexico

Worldwide Measures to facilitate trade.: 

Worldwide Measures to facilitate trade. G.A.T.T. – General Agreement on Tariffs and Trade – Part of W.T.O. after 1994. Most Favored nation status – All members of WTO have to be given similar trading privileges. U.S. granted special status to China before it was part of W.T.O. W.T.O. I.M.F. – Facilitates trade by regulating exchange rates. Also gives loans and economic advise/direction.


G.A.T.T. General Agreement on Tariffs and Trade – established in 1947 to facilitate trade - nondiscrimination, transparent procedures, settlement of disputes and participation of developing countries. From 1962 to reduce tariffs. No enforcement powers and covered manufacturing and fuels. Main issues in the last round of talks in 1986-1994 were agriculture, Textiles and apparel, services and intellectual property. Also power to enforce policies and decisions. Developing countries concerned with opening developed country markets for agriculture (subsidies) and textiles (quotas). Developed countries (mainly U.S.) concerned with services (Govt. restrictions) and intellectual property (piracy). W.T.O. - This lead to the formation of the W.T.O. (World Trade Organization) in 1994. GATS and TRIPS agreements to deal with services and intellectual property. Video – From GATT to WTO

World Trade Organization: 

World Trade Organization 149 countries (as of December 2005) Lower trade barriers, set rules governing trade between its members, settle trade disputes, and issue binding decisions. Video on WTO with examples of its work  WTO website GATT became one of the agreements under WTO General Agreement on Trade in Services. (GATS) Trade related aspects of intellectual property rights (TRIPS)

Trade Agreements: 

Trade Agreements A group of counties come together and agree to cooperate in international trade by various means. Mainly economic advantages. Trade creation and trade diversion, reduced Import Prices, Increased competition and economies of scale, Higher factor Productivity. Political Factors and power in international markets.

Levels of Economic Integration.: 

Levels of Economic Integration. Regional Cooperation Groups. Free trade areas. Full customs union. Common market. Economic union.

Regional Cooperation Groups.: 

Regional Cooperation Groups. Cooperate to develop basic industries like steel, hydro-electricity etc. Joint ventures, pooling of technologies/resources. Mainly less developed countries. No effect on trade or tariff barriers. For Example - A.S.E.A.N. Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam The South Asian Association for Regional Cooperation (SAARC) Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and SriLanka. ASEAN

Free Trade Areas.: 

Free Trade Areas. No Internal Tariffs. External Tariffs could be different. Cooperation on economic issues. No free labor or capital movements. N.A.F.T.A. -- U.S.-Israel, European Free Trade Area

Full Customs Union.: 

Full Customs Union. No Internal Tariffs. Common External Tariffs. No Free labor or capital movements. Usually a small country close to a large one. France-Monaco Italy-San Marino.

Common Market.: 

Common Market. No Internal Tariffs. Common External Tariffs. Free flow of labor and capital. Southern Cone Common Market (Mercosur) - Argentina, Brazil, Paraguay, Uraguay, Bolivia, and Chile. Caribbean Community and Common Market.

Economic Union.: 

Economic Union. No Internal Tariffs. Common External Tariffs. Free flow of labor and capital. Integration of economic policies. Harmonize monetary policies, taxation, and government spending. Common currency or fixed exchange rates. E.U. - Full monetary union by 1999 and single European currency by 2002.

European Community/ European Union.: 

European Community/ European Union. Economic, monetary, fiscal and political union. Single Euporean Act (A true common market for goods, people and money by 1992) Maastricht Treaty 1994 (Economic and monetary union with a commitment to political union). EC institutions - The European Commission, Council of Ministers, European Parliament, European Court of Justice. http://europa.eu.int/inst-en.htm

EU Institutions.: 

EU Institutions. The European Commission - Executive branch, commissioners oversee 23 directorates such as agriculture, transportation, etc. Council of Ministers- votes based on country size, final power to decide EU actions. European Parliament - 626 members elected by popular votes in member countries, advisory body with very little power. European Court of Justice - Judicial branch, mainly matters related to trade and business disputes.

Strategic Implications of E.U.: 

Strategic Implications of E.U. One Large market - standardization. Global Strategies - production, distribution, financing etc. Transaction costs eliminated. Economies of scale in - Production, transportation, promotions, pricing etc. Highly competitive environment - efficiencies needed to compete. Mergers and other shakeouts in industry. Centralization and consolidation.


NAFTA. Benefits similar to the E.U. in terms of one Large market Additionally Mexico is a different economy with different comparative advantages. Stop firms from looking for cheap labor in outside markets. Encourage foreign investment in this market. Increase competitiveness in outside markets Labor and environmental issues. North American Agreement on Labor Cooperation and Commission on Environmental Compliance.


NAFTA. Market Access - eliminate all tariffs on products traded between the three countries within 10 years – Dec 2005. Nontariff Barriers - Mexico will eliminate all non-tariff barriers like quotas, Import licenses.local content requirements, etc. Rules of Origin - Tariff-Shift rule and Value-Content (62.5%) Rule. Customs Administration - uniform customs procedures and regulations.


NAFTA. Investment – No requirements like exports, local content, transfer of technology, limits on imports. Services - allowed to open wholly owned subsidiaries and operate without any restrictions. Intellectual Property - protection of intellectual property. Government Procurement - fair and open competition, and transparent and predictable procurement procedures. Standards - prohibits the use of standards and technical regulations as obstacles to trade.

Latin America.: 

Latin America. Economic and trade liberalization. Deregulation, Privatization and control of inflation. Economic cooperation between each other and with the U.S. Free Trade Area of the Americas (FTAA).

Southern Cone common market (MERCOSUR).: 

Southern Cone common market (MERCOSUR). Uniform external tariffs and free movement of goods, capital, labor and services. No central institutions like EC. http://www.mercosurinvestment.com/intro.html Strongest agreement, working well and seeking to expand - Other Latin american countries, U.S., Canada, and EC (1999). South American Free Trade Area (SAFTA).

ASEAN Free Trade Area : 

03/09/98 ASEAN Free Trade Area Indonesia Malaysia The Philippines Singapore Thailand Myanmar Laos Brunei Cambodia Thailand Vietnam


AFTA. Primary Multinational group in Asia. Fastest growing economies in the region. Economic integration and cooperation. Reduced Tariff and non-tariff barriers, guaranteed member access to markets, and harmonized investment incentives. All non-tariff barriers removed immediately, import tariffs reduced to 0-5% in 2003, 0% by 2010.

APEC - Asia Pacific Economic Cooperation : 

03/09/98 APEC - Asia Pacific Economic Cooperation The Asia-Pacific Economic Cooperation forum is a loose grouping of countries bordering the Pacific Ocean who have pledged to facilitate free trade and economic cooperation Its 21 members range from China and Russia to the United States, Japan and Australia, and account for 45% of world trade. Progress on free trade initiatives was seriously dented by the 1997-98 Asian crisis, which hurt the economies of the fast-growing newly industrialized countries like South Korea and Indonesia, and the SARS epidemic of 2003. But recently China suggested it would be interested in establishing a free-trade zone with the growing economies of South-east Asia. http://www.apecsec.org.sg/

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